Primary Functions Of Banks

Following are the primary Functions of Commercial Banks

Banks have two Primary Functions:

(1) Accepting deposits

(2) Advancing loans


(1) Accepting Deposits: The bank accepts the deposits from the Public. People deposited their money as Per their convenience and capability in the following accounts:

(i) Fixed or Time Deposit Account: Money is deposited in this account for a fixed Period. The depositor gets a fixed deposit receipt. The receipt contains the name of the depositor, the amount deposited, the rate of interest and the Period for which the deposit is made. This receipt is not transferable. If the depositor needs this money before the completion of the deposit time Period, then bank refunds this money to him after charging some discount. The money deposited in this account earns maximum interest. The longer the Period of deposit, the higher will be the rate of interest on the deposit. The reason for it is that banks can use this money for a longer Period. Money deposited in this account is also known as the Time Liability of the Bank.

FIXES DEPOSIT

(ii) Current or Demand Deposit Account
: In this account, a depositor can deposit money any number of time and can withdraw it as when he requires it. In this account, generally, the businessman's deposits the money. Generally, the bank does not pay any interest on the deposit. If the total amount deposited is less than the minimum amount required, then the bank can charge some service charges. Money is withdrawn from this amount by cheque. Money deposited in this the account is generally known as the demand liability of the bank.

(iii) Savings Deposit Account: This account is to encourage small savings. The bank Pays interest on this account which is less than that of fixed deposit account. Money deposited in this account is known as Demand Liability of the bank.

(iv) Recurring Deposit Account: In this type of account, a depositor deposit a fixed amount of money for a fixed Period. The money is deposited on a monthly basis. This money cannot be withdrawn before the expiry of a fixed term except in certain conditions but it does not mean that the money can not be withdrawn before maturity. The amount of interest which is received on the money deposited in this account is re-deposited along with the Principle. This account attracts higher interest in comparison to other accounts like the fixed Deposit Account. Money deposited in this account is known as time Liability of the Bank.


 (v) Multiple Option Deposit Account: It is a type of savings bank account in which deposit in excess of a Particular limit gets automatically transferred into Fixed deposit/Term deposit. On the other hand, in case the adequate fund is not available in our Savings Bank Account so as to honour a cheque that we have issued, the required amount gets automatically transferred from Fixed Deposit/Term Deposit to the Savings Bank Account. The balance amount continues as Fixed Deposit and earns interest as per the existing rate of interest. It is to be noted that one can earn a higher rate of interest from a Fixed Deposit Account than from a Savings Bank Account. Therefore, the account holder has twin benefits from this account - (i) he can more interest and (ii) it lowers the risk of dishonouring a cheque.



(2) Advancing Loans: Another main function of a bank is to advance loans to People. A bank receives money through deposits. A certain part of this money is transferred to the cash reserve and the balance is used by the banks for advancing loans. These banks generally Provide loans for Productive works and while doing so, they demand Proper security. The amount of loan is generally lower than the value of the security. The banks advance loans of the following types:

(i) Cash Credit: Under this, a borrower is allowed to withdraw a specific amount on the basis of a specific security. The borrower withdraws the money and deposits it within this specific limit only. The bank charges interest only on the money withdrawn.

(ii) Overdraft: The customer, who maintains a current account with the bank, takes Permission from the bank to withdraw more amount than deposited in his account. The extra money withdrawn is called Overdraft. This facility is mainly available for trustworthy customers for a small Period. for instance, if in an individual's account rs. 10,000 is deposited and the bank has allowed him to issue a cheque to rs.12,000 then rs.2,000 is an overdraft facility.



(iii) Demand Loan
: These loans are Provided by the banks against the security of fixed Deposit Receipt (FDR), Govt. Securities, Life Insurance Policies etc. These loans are called demand loans because the bank can demand them at any time.

(iv) Term Loan: These loans are Provided by the banks to their customers for a fixed Period to Purchase machinery, truck, scooter, house, etc. The borrowers repay these loans in monthly/ quarterly/ half yearly/ annual instalments.

(v) Discounting of Bill of Exchange
: This is another method of Providing advances by the banks. Under this, a bank gives money to his customers on the security of a bill of Exchange before the expiry of the bill in case a customer needs it. After charging a discount for the remaining Period of the bill, the bank makes immediate Payment against the bill. Bank discounts only trade bills. The bank charges interest from them as Per the market rate and realises its money on the completion of the Period of the bill of Exchange.    



     

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